What Your Auto Dealer Doesn’t Want You to Know About Financing an Extended Auto Warranty

When it comes time to sign on the dotted line at an auto dealership, the last thing most people are probably thinking about is adding an extended auto warranty to their purchase. Rest assured, however, that you’ll be pitched on these plans by the finance manager, whose job it is to increase the sales potential of any transaction that the dealership processes. Certainly, extended auto warranties aren’t bad. They’re a fantastic addition to any auto purchase, new or used. But there can be some caveats during the purchasing process that an uninformed buyer will overlook… and such a mistake could result in you paying too much.

An auto dealer will make sure you understand all the pros these service contracts offer while pitching you to finance an extended auto warranty. Most of the points they make are entirely true. Such warranties add additional coverage and protection that kick in after your car’s standard bumper-to-bumper warranty expires. Many have great coverages, little or no out-of-pocket costs and plenty of servicing options, with some even including roadside assistance and trip interruption coverages.

The question here, though, isn’t the efficacy or practicality of these service plans. Rather, it’s what your auto dealer doesn’t want you to know when you finance an extended auto warranty during a purchase.

So, here’s the deal.

It’s a Profit Upsell for Them

Foremost, it’s important to understand that auto dealerships are for-profit businesses. Everything that you add on to your purchase, past what’s included in the sticker price, is a profit upsell for them. What this means when it comes to an extended auto warranty is that they’re marking up a wholesale product, just like they are on the cars they’re selling, to earn a handsome profit.

What it also means is that they’re likely charging too much, and you should be shopping around to be certain. You don’t need these extended warranties from day one on a new vehicle purchas, and you’ve got plenty of time to shop around for one before making a buying decision that fattens a dealer’s pockets.

The Interest Adds Up

Another thing to consider when you finance an extended auto warranty is that you’ll be wrapping that cost into your auto loan. The next most important thing you’re going to want to do is some basic math to determine how much extra you’ll be paying in interest fees if you include this warranty in your coverage.

Now warranties can range from $2,000 to $3,000 (for the best ones) that gets rolled into your financing. Factor this cost against the interest rate being offered by the bank on the loan, and you can see how financing one easily adds up to costing you a lot more than it would by instead purchasing a third-party warranty outright that has no hidden fees, like interest. Most third party service contracts offer no interest payment options.

You Don’t Need It Right Away

Auto dealerships are masters at marketing and they consistently use one strategy: Sense of urgency. You’ve seen this in their ads: “Hurry this sale won’t last!” Or, “For this weekend only, get these savings!”

Sometimes it makes sense to race down on a Labor Day weekend to get factory added incentives that you won’t find other times of the year. It’s important to note that there isn’t any factory added incentives of any kind for an add-on like an extended auto warranty.

The reality is that all new cars come with a standard warranty that lasts at least 36,000 miles. What this translates to is this: You have 36 months or 36,000 miles to decide whether you need an extended auto warranty from the date of purchase. So why rush the decision when you’ve got at least three years from the date of purchase to decide before your existing coverage expires?

There Are Plenty of Good Third-Party Options

Finally, it’s smart thinking to shop around before you make a large purchase decision. You’ve certainly done some research and shopping to arrive at a buying decision for your new car. The warranty shouldn’t be any different.

So instead of feeling pressured by the auto dealership or paying added fees that can be avoided, relax. Take some time—you’ll have plenty of it—and do some research. What you will quickly find is that there are plenty of wonderful options for extended auto warranties that are competitively priced and not pushed on at the last minute by a finance officer at a car dealership.

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